S&P turns slighly less pessimistic about California’s credit rating

Standard & Poor’s removed California’s debt rating from CreditWatch today, which means S&P is not likely to cut the rating — already lower than any other state’s — over the next 90 days. But S&P says its outlook for the next six months to two years remains negative.

That means a rating cut is still possible but “not quite as imminent” as it was before the latest budget fix was passed, says S&P analyst Gabriel Petek.

In its report, S&P disclosed that Gov. Arnold Schwarzenegger plans to ask the Legislature to approve $2.7 billion in “intra-year payment deferrals.” This would involve shifting some payments due earlier in the fiscal year until April and May, when the bulk of income tax revenues have come in.

If it can delay those payments, the state would only need to sell $7.8 billion in revenue anticipation notes in mid-September. Last week the treasurer and controller said the state would need to issue $10.5 billion in RANs. A RAN sale lets the state borrow money earlier in the fiscal year when its coffers are empty and repay it by the end of the fiscal year in June, when it is flush with tax revenues.

The governor’s new plan calls for delaying about $1.75 billion in payments to K-12 schools, community colleges and the university systems. Certain payments due in February and March would be paid in April and May.

It also would defer $425 million in payments to cities and counties for their share of the gasoline tax. Payments due in November through March would be paid in late April.

It also would delay about $500 million in payments to the federal government for certain welfare programs.

“We have worked cooperatively with the Legislature in the past on cash-management issues and we hope we will be able to do so this time,” says H.D. Palmer, a spokesman for the state finance department.

But Tom Dresslar, a spokesman for the Treasurer’s office, says until that happens, “our cash flow borrowing need is $10.5 billion. That’s the operative number.”

S&P also affirmed its A rating on the California’s general obligation bonds today. (Moody’s and Fitch have slightly lower ratings.) It said the recently adopted budget amendment “significantly reduces state expenses and provides a path to improved financial liquidity.”

But it retained its negative outlook on the rating, “reflecting our concerns over the state’s current reliance on nonrecurring fiscal adjustments.”

S&P also questioned the state’s assumption that the economy will level off, thereby solving a large projected deficit for fiscal 2010. “We believe the limited indications of economic stabilization are precarious, and if economic or revenue trends substantially falter, the state’s rating could incur downward revisions during the intermediate term,” it said. It added that “structural factors may limit the rating to the current category even when economic and revenue performances improve.”